Fed Trims Rates Again—Gold Vaults Past $4,200 Anyway

In a hotly-anticipated announcement, the Federal Open Market Committee shaved its federal-funds target by another quarter point on December 10th, setting the range at 3.50 – 3.75 percent. Fed officials insist the U.S. economy is still expanding at a “moderate pace,” yet the same statement concedes that job gains have cooled and unemployment inched higher through September. Inflation, the Fed admits, has “moved up since earlier in the year and remains somewhat elevated.” Markets heard the cautionary tone—and rushed instead to the monetary metal: spot gold spiked Wednesday to an intraday high of $4,231 per ounce, underscoring widespread doubts that a nibble at interest rates will tame rising prices.

Behind the headline move, the Fed tweaked its entire liquidity toolkit. Effective December 11th, the interest rate paid on reserve balances drops to 3.65 percent, and the primary-credit discount window slides to 3.75 percent. New York’s Open Market Desk is tasked with corralling the funds rate in the 3.50 – 3.75 percent corridor while offering daily overnight repos at 3.75 percent and reverse-repos at 3.50 percent, capped at a hefty $160 billion per counterparty. To keep “ample reserves” flowing, the Desk will keep buying short-dated Treasuries as needed, roll over all maturities, and plow mortgage-backed-security paydowns into yet more T-bills—a roundabout way of saying the balance sheet won’t be shrinking anytime soon.

Even so, labor worries crept front and center. The Committee judged that “downside risks to employment rose in recent months,” a stark shift from this year’s earlier celebration of a supposedly tight jobs market. Yet the statement also pledges to keep pushing inflation back to its 2 percent target—an objective the Fed has missed for too many months to count. For those schooled in Austrian economics, the promise sounds familiar: more credit today, hope for price stability tomorrow.…